"We are expecting a 6% volume growth in steel consumption in the current year." - Views on News from Equitymaster

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  • Aug 31, 2002 - "We are expecting a 6% volume growth in steel consumption in the current year."

"We are expecting a 6% volume growth in steel consumption in the current year."

Aug 31, 2002

Mr. R C Nandrajog is Vice President Finance at Tata Steel, where he has served for nearly 35 years. Mr. Nandrajog has been with Tisco since 1966, where he joined as a graduate trainee. Mr. Nandrajog’s interests include photography and golf. He is also a visiting professor at XLRI. In an interview with Equitymaster, Mr. Nandrajog shared his views on the steel sector and Tisco’s strategies in general.

EQTM : What is your view on steel prices? Do you think the current rise is sustainable and why? What is the difference between landed cost of steel and domestic steel prices?

Mr. Nandrajog: The steel industry is undergoing a little bit of change over the last few months. Certain factors in particular have influenced the rise in prices. It was initially triggered by the US sanctions and the US steel price went up. Secondly, I think there is some amount of restructuring taking place including the consolidations. Third reason is that China and Japan are growing very fast. China is facing shortage of 20 m tonnes, which is likely to sustain for few years. Lastly, OECD (Organization for Economic Co-Operation Development) countries have taken a view to reduce the installed capacity. They have identified 125 m tonnes of idle capacity worldwide, which is likely to result in shut down of few plants over a period of time. All these factors together have led to rise in steel prices. But whether prices would increase or not, cannot be ascertained. Even after a steep hike in prices, domestic steel prices are lower by Rs 1,500 per tonne compared to landed cost.

EQTM : If China increases its steel production capacity, what would be the impact on the steel industry and on Tisco in particular?

Mr. Nandrajog: I think China is producing 130 m tonnes and 50% of this capacity is very old and inefficient. China would like to replace it with modern capacity. I don’t think China is going to change the situation for the Indian steel market, atleast not in the next 4-5 years.

Tisco has been able to produce hot rolled coils at one of the lowest operating cost of US$ 150 per tonne. China is also producing at the same cost and undercutting means that they will have to pay money from their own pockets. No business on a long-term basis can sustain with such model. This strategy could run for a small quantity and for a small period.

EQTM : Tisco’s semi-finished steel sales have declined by 20% in FY02 and it accounted for 11% of total sales. What is your strategy for this stream of revenues?

Mr. Nandrajog: We would definitely like semi steel sales to come down, 6% targeted in FY03. In the coming years, the proportion would come down further, as the share of value added products increases. Last year, we were producing approximately 70% of our CR steel capacity (just over 0.7 m tonnes). This year we plan to cross 1 m tonnes and next year near 1.2 m tonnes. Higher CR sales would increase the proportion of value added steel. We are expecting a 6% volume growth in steel consumption in the current year. It would mostly be from infrastructure and auto sector.

EQTM : Please give us some idea on your capex plans (maintenance capex). Saleable steel capacity utilization has already reached to 110%, welded steel tubes stands at 94%. Will you be adding new capacities in the coming years in view of the high utilization?

Mr. Nandrajog: Our installed capacity is at 3.4 m tonnes. Last year, we produced 3.57 m tonnes. This year we should be able to produce 3.8 m tonnes and next year 4 m tonnes. This is not by adding capacities but by putting in balancing facilities here and there and also improving our efficiencies.

Whether we would be required to add new capacities depends on the demand scenario at that time. If auto majors decide to source all their requirements from India and inspite of 110%-120% capacity utilization, we are unable to meet their requirements, then it is the case for putting up the new capacities. But as of now we cannot ascertain whether capacity addition would be required.

EQTM : Could you give some idea on number of employees required per million tonne of steel production?

Mr. Nandrajog: Number of employees required per tonne of steel depends on the level of technology. If you see a steel plant, which buys its raw material rather than producing the same, it needs very few employees. So there cannot be a standard set of employees. Even a steel plant using modern technology or fully automated steel plant will use very few employees than a plant, which is set up 50 years behind. So there cannot be a fixed number. Take the case for Tata Steel. While the production has gone up in the last few years, the number of employees has declined significantly. Our production from mines and collieries have also gone up. Improving the efficiencies and also putting certain modern plants have achieved this. We really don’t know what will be the correct requirement of manpower for a normal plant. We keep on making certain changes, which would improve productivity and correspondingly the number of employees will come down. We fix a target for one year. This year we wish to reduce the number to 42,000.

EQTM : Power units required per tonne of steel produced reduced to 341 m in FY02 (avg. decline of 16% since the last three years) and average power cost has increased to Rs 5.6 per unit in FY02 (Rs 3.8 in FY00). Power cost can increase till what levels and what cost saving the company would have by sourcing the same from Tata Power?

Mr. Nandrajog: Power cost is expected to come down gradually. This is due the fact that we have a front-ended contract with Tata Power. The consumption of power per tonne of steel produced will go up, as we will be producing more and more value added products. CR need, higher power consumption. However, cost per unit should now come down. Our dependence on public utilities is already reduced. Another thing is that currently we are not utilizing fully Tata Power’s capacity. As the consumption of power by us as well as other industries in and around Jamshedpur increases, the power load factor will increase too. As a result per unit cost will come down.

EQTM : Tisco is expected to generate huge cash flow in absence of any fresh capacity additions in the coming years. Would you be utilizing this amount in increasing investments or in reducing your debt? What are the synergies between Tisco and Nalco?

Mr. Nandrajog: Last three years, we have been reducing the interest cost by restructuring the debt. This year also we will do the same. We are comfortable with debt to equity ratio of 1x. This year the ratio will go down below 0.9x (before taking into account deferred tax amount), as we don’t have any capex or diversification plans. We have planned for Rs 4.9 bn capex in FY03 and maintenance capex would be about Rs 5 bn for the next three years.

As far as investment in Nalco is concerned, the company of our size will be offered many opportunities, particularly when we are generating positive cash flows. So these options we will always discuss amongst ourselves. We have however, not yet taken any decision on the same.

EQTM : Give us some update on your titanium and ferrochrome project.

Mr. Nandrajog: For titanium project, we have signed an MOU with the Tamilnadu government. Investigations have already started. It will take one or two years, before we decide whether to go ahead or not. On ferrochrome project, no decision has been taken yet.

EQTM : A word on your favourite books and any personalities that have influenced you?

Mr. Nandrajog: I have just finished reading the book ‘Jack’ from Jack Welch. Recently I have been gifted a book named ‘Negotiation Skills’ by the Jamshedpur management association. I have not yet started reading this book. As I am little straight forward (in marketing), it would be interesting to read this book.

Dr. Irani has left a very good impression on me. He is a person who is a very fast decision maker with no biases. I have worked with him for 5 years as personal executive officer. Mr. Ratan Tata is also a fantastic person. He can ask very incisive questions without really antagonizing anyone. It is the skill these people have got, which are really required to be emulated and learned.

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